Colonial In The News

Forbes: The Market Price Is The Market Price, Whatever The FERC Or Anyone Else Says About It

By Tom Worstall, Forbes 

NEW YORK
- David Cay Johnston has an interesting piece over at Al Jazeera. The specifics of what he’s alleging are that there’s Rockefeller style price gouging going on in the market for transport pipelines for refined oil products. Which, if true, is probably not very good and possibly also illegal. But it’s not the specific case that interests me, it’s the contribution this can make as an example to the much more general economic point that the market price simply is the market price, whatever anyone else might have to say about it.

As background, there’s a network of pipelines that feed gasoline, avgas and so on around the country. Some parts of that network have higher demand upon them than capacity. And thus:

The immediate issue involves Colonial Pipeline, the largest system for moving gasoline, jet fuel and other refined petroleum products. Charles and David Koch, Shell Oil, a subsidiary of the KKR private equity firm and two other enterprises own the system, which has more than 5,000 miles of pipe and serves 13 Eastern states.

The latest price gouging arises because the demand to move refined petroleum from Texas to the East Coast is outstripping the pipelines’ capacity. Some longtime users who have rights to ship through Colonial pipes have been reselling their rights for huge markups, which they then pocket.

In reselling capacity, these shippers have made themselves common carriers under the law Congress enacted in 1887 to stop the abuse of customers by Rockefeller and others.

Leave the specifics aside and look at that deeper economic story. This is all supposedly price regulated: and yet the market price for that scarce capacity is still the market price for that scarce capacity. However, instead of the pipeline owners getting that scarcity value it’s people with the rights to use the pipeline who are. Yet the price of transportation is still the market price, whatever the regulation of those prices.

That is, the market mechanism always will out. And that is a larger lesson we need to learn for public policy reasons. Set the legal price of toilet paper below production costs, as Venezuela has done, and toilet paper will disappear or be sold on the illegal market for the cost of production plus a profit. That profit being higher to make up for the risks of doing something illegal. Set the price of labour higher than the market clearing price, as the US does with the minimum wage, and that market price makes itself evident again in the form of unemployment: people earning the $0 an hour which is the true minimum wage.

Unfortunately, it actually gets worse than this. Because the price fixing distorts the incentives. Note where that money is going in the pipeline case. If the market price for the constrained capacity were going to the pipeline owners then there would be an incentive for them to expand their pipeline. And if the price of transporting refined products was simply the market price then there would also be an incentive for someone to build an additional pipeline. But the price regulation insists that the actual owners, operators, of the line cannot charge the market price. Thus that higher price coming from constrained supply is being taken by those with transport rights: exactly the group of people who have no incentive whatsoever to increase the supply of pipeline services.